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2
= Variance in the ln (value) of the underlying asset
The model can be written as:
Value of call = SN(J1) Kc
-t
N(J2)
Where
J1 =
ln[
S
K
+[r +
c2
2
t
J2 = J1 o
t
And N(x) is the cumulative probability distribution function for a variable that that is normally
distributed with a mean of zero and a standard deviation of 1.0.
- 31 -
4.4.2. BINOMIAL OPTION PRICING
Binomial option pricing is a simple but powerful technique that can be used to solve many
complex option-pricing problems. In contrast to the Black-Scholes and other complex option-
pricing models that require solutions to stochastic differential equations, the binomial option-
pricing model (two state option-pricing Model) is mathematically simple. It is based on the
assumption of no arbitrage.
The assumption of no arbitrage implies that all risk-free investments earn the risk-free rate of
return and no investment opportunities exist that require zero dollars of investment but yield
positive returns. It is the activity of many individuals operating within the context of financial
markets that, in fact, upholds these conditions. The activities of arbitrageurs or speculators are
often maligned in the media, but their activities insure that our financial markets work. They
insure that financial assets such as options are priced within a narrow tolerance of their
theoretical values.
4.4.2.1. Binomial Option Pricing Model
Assume that we have a share of stock whose current price is $100/share. During the next month,
the price of the stock is either going to go up to $110 (up state) or go down to $90 (down state).
No other outcomes are possible over the next month for this stock's price.
- 32 -
Beginning Value End of Month Value
$110
$100
$90
Figure 4.1 Binomial One Period
Now assume that a call option exists on this stock. The call option has a strike price of $100 and
matures at the end of the month. The value of this call option at the end of the month will be $10
if the stock price is $110 and 0 if the stock price is $90. The payoff at maturity (one month from
now) for this call option is:
Beginning Value End of Month Value
$10 given a stock price of $100
Call Price today
$ 0 given a stock price of $ 90
Figure 4.2 Stock Price movement in Numerical Example
The question is: what should be the price of the call option today?
Consider what happens when we make the following investments in the stock and the call option.
Assume we buy one-half share of stock at $50 (.5 share times $100), and at the same time, we
write one call option with a strike price of $100 and maturing at the end of the month. Our
- 33 -
investment then is $50 less the current price of the call option. The payoff from this position at
the end of the month would be as follows: if the stock price is $110, our stock position is worth
$55, and we would lose $10 on the option. The return would thus be $45 if the stock price
reached a price of $110. On the other hand, if the stock price should go down to $90, the value of
our stock position would be $45 and the value of our option position would be 0. The payoff in
this case would also be $45
Investment Payoff
1
2
sorcostock colloption
$SS Hox|11u 1uu,u] = $4S
1
2
sorcostock colloption
$Su colloption
1
2
sorcostock colloption
$4S Hox|9u 1uu,u] = $4S
Figure 4.3 Binomial One Period Payoff
The net effect of taking this particular position on this stock with this payoff structure is that our
payoff is $45 regardless of what happens to the stock price at the end of the month. The effect of
buying 1/2 a unit of the stock and writing a call option was to change a risky position into one
that is risk free with a payoff of $45 regardless of the stock price at the end of the month.
Assuming no arbitrage opportunities, an investor who makes this investment should earn exactly
the risk-free rate of return.
- 34 -
Thus, we know that the investment, $50 minus the call option price, has to be equal to the
present value of $45, the payoff, discounted for 1 month at the current risk-free rate of return.
In order to find the current price of the call option, we need only solve the following equation for
the option price:
$Su option pricc = $4S. c
-R]1
0ption Pricc = $Su $4S. c
-R]1
Where Rf is the risk-free rate and T is the time to maturity in years. Assuming that the current
risk-free rate of return is 6% per annum and a time to maturity of one month, T=.08333, the
current option price of this call option should be $5.22.
The process used to price the option in this example is exactly the same procedure or concept
used to price all options, whether with the simple binomial option model or the more
complicated Black-Scholes model. The assumption is that we find and form a risk-free hedge
and then price the option off of that risk-free hedge. The key assumption is that the riskless
hedge will be priced in such a way that it earns exactly the risk-free rate of return, which is
where arbitrageurs come in to play. It is the activity of these individuals, looking for
opportunities to invest in a risk less asset and earn more than the risk-free rate of return that
insures that options are priced according to the no-arbitrage conditions.
- 35 -
4.4.2.2. Risk Neutral Approach
The basic argument in the risk neutral approach is that since the valuation of options is based on
arbitrage and is therefore independent of risk preferences; one should be able to value options
assuming any set of risk preferences and get the same answer. As such, the easiest model is the
risk neutral model.
In the risk less hedge approach, the probability of the stock price increasing, Pu, or the
probability of the stock price decreasing, Pd = 1-Pu, did not enter into the analysis at all. In the
risk neutral approach, given a stock price process (tree) we try to estimate these probabilities for
a risk neutral individual and then use these risk neutral probabilities to price a call option. For
example, we will use the same price process as the original risk less hedge example.
Beginning Value End of Month Value
$95
$ 75
$63
Figure 4.4 Stock Price Movements
- 36 -
If an individual is risk neutral, then they should be indifferent to risk and as such for them the
current stock price is the expected payoff discounted at the risk free rate of interest. Assuming a
6% risk free rate, a risk neutral individual would make the following assessment:
$7S = |Pu. $9S +(1 Pu). $6S]. c
-]1
If we solve for P
u
,
Pu =
$7S. c
-]1
$6S
$9S $6S
If RF = 6% and T=.08333, then P
u
= .38675. This is the risk neutral probability of the
stock price increasing to $95 at the end of the month. The probability of it going down to $63 is
1-.38675= .61325. Now given that if the stock price goes up to $95, a call option with an
exercise price of $65 will have a payoff of $30 and $ 0 if the stock price goes to $63, a risk
neutral individual would assess a .38657 probability of receiving $30 and a .61325 probability of
receiving $ 0 from owning the call option. As such, the risk neutral value would be:
Colloption:oluc = |Pu. $Su + (1 Pu). $u]. c
-0.6.083333
Call Option Value = $11.54
- 37 -
4.4.2.3. Estimating the Binomial Stock Price Processes.
One of the difficulties encountered in implementing the binomial model is the need to specify the
stock price process in a binomial tree. While it is not transparent, when we use the Black-Scholes
model we are assuming a very explicit functional form for the stock price. If we are willing to
make the same assumptions when we are using the binomial model we can construct a binomial
model of the price process by using the volatility , to estimate up, u, and down, d, price
movements. This is done in practice as
u = c
ct
onJJ = c
-ct
Where is annual volatility and t is the time between price changes. For example, assume a
current stock price of $55, a volatility of .20, = .20 and that the time to between price changes
is 1 month, t = .08333. Then u = et= e
.20 .08333
= 1.0594 and then d = e-s Dt = e
-.20 .08333
= 0.9439 and the stock price process over the one month interval would be:
Beginning Value End of Month Value
$45 x 1.0594 = $47.67
$ 45
$45 x .9439 = $42.47
Figure 4.5 Stock Price Movement in Numerical example
- 38 -
If we keep the same ending point but let the price change every 2 Weekt = .u4167, thenu =
c
ct
u = c
0.200.04167
= 1.u4167
And
J = c
-ct
= c
-0.200.04167
= u.96
And the stock price process over the one month interval would be:
Now 2 weeks 1 month
$46.88 x 1.04167 = $48.83
$45 x 1.04167 =$46.88
$45.00 $46.88 x 0.96000 = $45.00
$43.20 x 1.04167 = $45.00 $ 45 x .96 = $ 43.20
$ 43.20 x 0.9600 = $41.47
Figure 4.6 Binomial Two Period
In the limit we could allow the price change for the example used above to change every week
(four times during the month and Dt = 1/52 = .01923) or daily (twenty-one times during the
- 39 -
month4 and Dt = 1/252 = .00397). Thus, given a volatility estimate we can construct the price
process for that security.
Once the price process for the underlying security is determined it is possible to use the binomial
model to price options on that security.
4.4.3. Monte Carlo Simulation
Simulation is a procedure in which random numbers are generated according to probabilities
assumed to be associated with a source of uncertainty, such as a new products sales or, stock
prices, interest rates, exchange rates or commodity prices. Outcomes associated with these
random drawings are then analyzed to determine the likely results and the associated risk.
Oftentimes this technique is called Monte Carlo simulation, being named for the city of Monte
Carlo, which is noted for its casinos.
Monte Carlo simulation is a widely used technique for dealing with uncertainty in many aspects
of business operations. For our purposes, it has been shown to be an accurate method of pricing
options and particularly useful for path-dependent options and others for which no known
formula exists.
To facilitate an understanding of the technique, we shall look at how Monte Carlo simulation has
been used to price standard European options. Of course, we know that the Black-Scholes model
is the correct method of pricing these options so Monte Carlo simulation is not really needed. It
- 40 -
is useful, however, to conduct this experiment because it demonstrates the accuracy of the
technique for a simple option of which the exact price is easily obtained from a known formula.
The assumptions of the Black-Scholes model imply that for a given stock price at time t,
simulated changes in the stock price at a future time t + t can be generated by the following
formula:
S = Srt +Soet
Where S is the current stock price, S is the change in the stock price, r
f
is the continuously
compounded risk-free rate, is the volatility of the stock and t is the length of the time interval
over which the stock price change occurs. The variable is a random number generated from a
standard normal probability distribution. Recall that the standard normal random variable has a
mean of zero, a standard deviation of 1.0 and occurs with a frequency corresponding to that
associated with the famous bell shaped curve.
After generating one standard normal random variable, you then simply insert it into the right
hand side of the above formula for S. This gives the price change over the life of the option,
which is then added to the current price to obtain the price of the asset at expiration. You then
compute the price of the option at expiration according to the standard formulas, Max (0, ST - X)
for a call or Max (0, X - ST) for a put, where X is the exercise price and ST is the asset price at
expiration. This produces one possible option value at expiration. You then repeat this procedure
many thousands of times, take the average value of the call at expiration and discount that value
- 41 -
at the risk-free rate. Some users compute the standard deviation of the call prices in order to
obtain a feel for the possible error in estimating the price.
Let us price a call option. The stock price is 180, the exercise price is 185, the risk-free rate is
0.05, the volatility is 0.29 and the time to expiration is 0.9523. Inserting the above approximation
formula for a standard normal random variable in any cell in an Excel spreadsheet produces a
random number. Suppose that number is 0.264166. Inserting into the formula for S gives
180(.05) (.9523) +180(.29) (.264166) .9523 =21.92.
Thus, the simulated value of the stock at expiration is
180 + 21.92 = 201.92.
At that price, the option will be worth
Max (0, 201.92 -185) = 16.92 at expiration.
We repeat this procedure several thousand times, after which we take an average of the simulated
option prices and then discount that average to the present using the present value formula.
.
4.5. FRAMEWORK OF REAL OPTIONS VALUATION
Before using real options to evaluate a project, people first need to understand
decision to be made and check if it is advantageous to use this approach
method. If so, the valuation can be divided into 5 steps, as shown i
Figure 4.7
The first step, most important drivers and uncertainties of the project should be found out.
- 42 -
FRAMEWORK OF REAL OPTIONS VALUATION
Before using real options to evaluate a project, people first need to understand
decision to be made and check if it is advantageous to use this approach over traditional
method. If so, the valuation can be divided into 5 steps, as shown in Figure 4.2:
4.7 Framework of Real Options Method
The first step, most important drivers and uncertainties of the project should be found out.
Before using real options to evaluate a project, people first need to understand clearly what
over traditional NPV
The first step, most important drivers and uncertainties of the project should be found out.
- 43 -
Usually uncertainties include market risk (such as the market demand, price of the product,
economic cycle), technical risk (such as if the project can be finished on time, if the project can
achieve its technical objectives).
The second step, an approximate probability distribution should be assigned to each uncertainty.
In many cases, a lognormal distribution is used for a market risk. If there are other project-
specific risks associated with the project, their probability distributions should be studied case by
case.
The third step, the most important options should be identified. Possible options practical to the
project studied can be identified with reference to the types of real options.
The fourth step, appropriate method among Black-Schools formula, binomial model, and
simulation is identified and applied to obtain the value of the options.
The fifth step, by comparing the value of the options and cost to obtain options, a set of strategies
and decisions can be reached.
Meanwhile, the mind-set regarding flexibility available and different is established. Valuators
need to be careful of the false precision of the value of an option, because the value is established
on many approximations and assumptions. This is why a sensitivity analysis is sometimes
needed. Nevertheless, the mind-set to value the flexibility is one of the major gains of this
project.
- 44 -
- 45 -
CHAPTER 5
CASE STUDY: NEW GANDERBAL HYDRO ELECTRIC PROJECT
5.1 INTRODUCTION
The New Ganderbal Hydro Electric Project (NGHEP) is envisaged as a run-of-the river scheme,
between Preng and Ganderbal along left bank of the Nallah Sindh, a tributary of River Jhelum.
The diversion site is located at Preng having the latitude of 34 16 21.29 N and longitude of 74
52 27.23 E in the Ganderbal District of Jammu and Kashmir, about 40 km away from Srinagar
along the Srinagar-Leh National Highway. The powerhouse is located 20 km downstream of
diversion site at Ganderbal having the latitude of 34 13 15.50 N and longitude of 74 46 46.98
E. This new hydropower development has been contemplated because the existing Ganderbal
HEP (GHEP), commissioned in 1955, with an installed capacity of 15 MW, located along the
same bank of the Nallah, has now outlived its normal life.
The Ganderbal Power Station is the last of the Hydro Stations at the tail end of Nallah Sindh, a
tributary of River Jhelum and was commissioned in 1955. The Station is located at Ganderbal,
about 20 km from Srinagar city on Srinagar Leh Highway. The site is connected by AA class
Road. The installed capacity of the station is 15 MW consisting of 2 units of 4.5 MW and 2 units
of 3 MW. The station has served 57 years and thus outlived its normal life. The station has also
been giving recurring trouble and units have been derated and remain under regular outage due
to O& M problems. It was considered appropriate by Power Development Corporation (J&K
Govt.) to take effective measures to improve the power generation at this power station.
- 46 -
For taking effective measures to improve the power generation at Ganderbal power station,
engineering studies were carried out and two reports were developed, one for renovating the
existing water conductor system to improve its carrying capacity and the other for renovating and
overhauling the equipments to improve the station performance. Any renovated machine cannot
be expected to perform the same way as new units and their life cannot be expected to be as long
considering that the age of the units. It has therefore been considered that it is better to build a
new station and utilize these existing derated units till the new ones are commissioned.
The studies on the New Ganderbal Hydro Electric Project in Jammu and Kashmir State were
initiated in 1984 as a part of the investigation to replace the existing station and at the same time,
to augment the capacity to the extent possible. M/S. Thaper Hydra Consult had prepared a pre-
feasibility report in November 1988 for the project. Subsequently they were appointed as
consultants to prepare feasibility report for development of the project proposal.
- 47 -
5.2 PROJECT CHARACTERISTICS
The data regarding the project is captured in Table 5.1
Table 5.1 Project Characteristics
PARAMETERS VALUE
Project life 35 years
Capacity 93MW
PLF 48%
Annual production 382.82 GWH
Free power to State 13%
Project Cost 8257.9 Million INR
O&M 2% of the project cost
Yearly increase in O&M cost 5%
Selling price for 1
st
year per KWH 5.19
Selling price levellised per KWH 4.34
Debt 70%
Equity 30%
Cost of debt 12%
Cost of Equity 15.50%
- 48 -
5.3 VALUING NEW GANDERBAL HYDRO ELECTRIC PROJECT (NGHEP)
In this chapter, I have applied binomial lattice method to study the case on NGHEP, more
specifically a deferral option of the project. To understand the pros and cons and the applicability
of the real options method in the valuation of the project, the NPV and IRR are compared with
the real options method.
5.3.1 Traditional NPV
Table 5.2 Project NPV Analysis
Details / Years
Construction
period 1 10 15 25 35
Cash Outflow -8257.90 0.00
Cash Inflow
Profit After Tax 578.61 796.20 678.32 534.55 463.79
Interest on term loan 693.66 48.17 0.00 0.00 0.00
Interest on working capital 0.00 0.00 0.00 0.00 0.00
Depreciation 233.77 233.77 233.77 233.77 0.00
Total -8257.90 1506.04 1078.14 912.09 768.32 463.79
The NPV is INR 141.81 Million using the discount rate of 12.58% for initial 10 years and
19.49% for next 25 years. With such an analysis, because the NPV is greater than 0, Project
should be carried out immediately.
- 49 -
Note in the above net present value analysis, there are three very important assumptions:
1, the power plant will produce to full capacity, and all the electricity produced can be sold.
2, the price is fixed and will not change in 35 years.
3, here a12.58% discount rate is used for 1
st
ten years and 19.49% discount rate is used, which is
the WACC of the project.
These three assumptions are hard to defend:
1. How can a plant always produce at full capacity and sell all the electricity produced for a
period of 35 years? It is not only a simplified case, but also the most optimistic case and
apparently not realistic.
2, it seems unreasonable to assume that the price for electricity does not change over life of the
project i.e. 35 years.
3, the choice of discount rate is always a problem when evaluating public projects, there is no
concrete logic or proof for a specific discount rate chosen.
Although there are apparently unrealistic assumptions behind the NPV method, the method is
still ubiquitous. The reason is the computation difficulty of more refined models, and the NPV is
much better than nothing.
- 50 -
5.3.2. Traditional Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) for Project can also be calculated. It is 13.72%. IRR provides
a better measure than NPV because it avoids the problem of choice of discount rate, and makes it
possible to compare the project with the expected return or capital cost to decide what to do.
Applying the traditional IRR valuation, the conclusion is that as long as the capital cost is less
than 13.72 %, the best strategy is to build the dam immediately.
5.3.3. Real Option Analysis
In this section I have used the Binomial tree model to calculate the value of the deferral option
using electricity price as the underlying.
5.3.3.1. A General Binomial Tree Framework for ROA
This section introduces the general binomial tree framework for ROA, and the following sections
will study the real options value with electricity price as the underlying.
- 51 -
Binomial Tree
Firstly, a binomial tree needs to be built based on some underlying describing the market
uncertainty. After building the binomial tree, a series of scenarios are developed with
probabilities, and what happens in each scenario can be analyzed. So a binomial tree can be
thought as an event tree in essence. To get such an event tree describing the market uncertainty,
one way is to lay out the scenarios of different NPVs, another way into present the evolution of
the electricity price.
Analysis of each scenario
Given the scenarios of underlying evolution, the expected payoff of each option can be
established. As Figure 5-1, a project with option 1, option 2 option n1 is valued. Given the
underlying value M, payoffs for each of those options can be calculated. The hold value is
calculated by discounted the expected value of next phase of the binomial tree.
M
Payoff for option 1
Payoff for option 2
Payoff for option 3
Hold value
Figure 5-1 Analysis of a scenario on the event tree
- 52 -
In the case of analyzing the deferral option for Project A, there is only one option. Only the
exercise value and hold value are entered into Figure 5-1.
Roll back
After establishing the options values for each scenario, the tree can be rolled back to get the
value of the option. The value for each scenario is:
Max (payoff for option 1, payoff for option 2, payoff for option n, the hold value)
Beginning from rightmost scenarios, the up probability pu and down probability pd are applied
to roll back to get the hold value for any scenario. Note the discount rate used must be risk
adjusted. The way to risk adjust the discount rate is to simulate the IRR and get the standard
deviation of the IRR. Note that different discount rates need to be applied to different cash flows
with distinct risk properties.
After rolling back the leftmost scenario, not only the value of options but also contingency
strategy can be developed.
- 53 -
5.3.3.2. ROA with Electricity Price as Underlying
The first step in ROA with electricity price as underlying is to calculate the volatility of the
electricity price and the drift rate r. For the options on stocks, the drift rate r is the risk-free
interest rate. If the underlying is electricity price, however, the drift rate cannot use the risk free
rate, it should be the expected change of electricity price per period of time.
5.3.3.2.1 Volatility
Can be calculated as standard deviation ofln [
P1
P0
, where P1 is the price of electricity at year 1
and P0 at year 0. The standard deviation for 5 years is 5
e
. The standard deviation is calculated
from the change in last 5 years prices traded at Indian Energy Exchange.
5
e
= .2051
Or
e
= 9.17%
5.3.3.2.2. Risk Adjusted Discount Rate
For risk free rate, I have checked the Indian government 10 year bond which has an annual rate
of 7.82% but we are taking as 8% for the calculation simplicity. According to Sensex the
expected value and the standard deviation of the market rate of return are approximately 16.5%
and 40%. So the market price of the risk
- 54 -
Po =
(RmR)
om
Or
po = u.212S
Substituting rf, p, and into capital market line equation, the discount rate for the project is
r = r +po. o2 = .u8 +u.212S u.16 = .114
The risk-adjusted discount rate r is 11.4% which represents the intrinsic risk profile of the
project.
5.3.3.3. Binomial Tree
Though the life span of the project is 35 years and if a stage of 1 year is used, then there will be
35 stages, so the stage is taken to be 5 years
With r = 11.4% and
e
= 9.17%
The various parameters per stage are as follows:
u = cS. o
u = 1.22
J =
1
u
J = u.81
pu =
c
J
u J
- 55 -
pu = u.74
pJ = 1 pu
pJ = u.26
The electricity price movement is established as the binomial tree in figure.5.2
Year 0 Year 5 Year 10 Year 15 Year 20
9.61
7.88
6.46 6.38
5.29 5.29
4.34 4.34 4.34
3.51 3.51
2.85 2.85
2.30
1.87
Figure 5.2 Electricity Price Movements
This event tree gives different scenarios of electricity price market. For each scenario the
exercise price and deferral value is calculated.
The exercise value is just the expected NPV of starting Project A given the specific price in the
scenario. Given the starting price of electricity in a specific scenario, the Project Ancash flow
- 56 -
simulation model can be used to get the expected value in this scenario. For example, for the
scenario in which the electricity price is 3.51/kWh, 3.51 are put as the starting price of electricity
in the Project cash flow simulation model, and the expected NPV of the project is 1069.32
Million INR.
The deferral value is the expected value if the option is not exercised. The deferral value is:
(:oluc in upstotc S ycors lotcr). Pu +(:oluc in Jown stotc S ycors lotcr). PJ
(1 +Jiscount rotc)S
= S27.S
0ption :oluc = Jccrrol :oluc stotic NPI
= S8S.S
5.4. Summary of Results
- 57 -
With all the above analysis using different methods, the following results for the Project are
obtained as in Table 5-3
Table 5.3 Summary of Results
NPV IRR ROA
Value 141.81 13.72 527.3
Option value N/A N/A 385.5
Decision Go Go Wait
Using traditional NPV method, the project value without flexibility is studied. Then real options
analysis using electricity price as underlying are used to obtain the value of the project with
flexibility (the deferral options). The difference between the project value with flexibility and the
value without the project flexibility is the deferral options value.
The conclusion is that the ROA with electricity pricing as underlying gives the most accurate
valuation as 385.5 Million INR, and it gives a strategy to develop the project, contingency plan
regarding what to do under different scenario. Given the high volatility of price the best strategy
is to wait until the price of electricity is mostly resolved. If the price is high then beginning
building the plant, if it is low then still wait.
- 58 -
CHAPTER 6
- 59 -
CONCLUSIONS
6.1. SUMMARY AND CONCLUSIONS
The Recommended methodology for New Gander bal Hydro Electric Project is ROA with
electricity price as underlying because it takes into account the flexible decisions that managers
can make after the project begins and not the NPV or IRR method which gives the primitive
financial evaluation and also miss the value of flexibility and they cannot provide the
contingency strategy for the projects.
6.2 LIMITATIONS OF THE RESEARCH
Although attempts have been made to give a sound options valuation model for the use of
stakeholders through this research, yet there have been certain limitations which might have
posed some impact on the soundness of the results. Some of the constraints faced during the
research and corresponding limitations are discussed below.
1. This research work is linked to a technique which is complex, the option theories and
models such as, the partial differential equation, the dynamic processes people use to
think that the options are the work of rocket scientists. In developing countries, what
makes things even worse is that financial options are not traded in local financial
markets. This is because the trade of options is very easy to foster fraudulence in a weak
legal system. If a person does not establish an understanding of financial options, he/she
- 60 -
will find it very hard to develop the idea of what the real options are and to have
confidence in the method.
2. Options analysis needs a lot of historical data to do objective analysis. In developed
countries, the abundant historical data on financial market provides the power of options
analysis - there is little subjective element in the analysis, and the magic of market tells
all. However, in developing countries, there is no complete financial market, and
consequently, the data is incomplete. Even with some data, the financial market is
decided by too much government interference so the information is highly distorted.
Although the difficulties in helping managers understand the methodology and the availability of
data problems, the real options method will be able to spread fast in developing countries
because of its insights into uncertainty and flexibility. The thinking is invaluable, nevertheless.
6.3 FUTURE SCOPE OF THE RESEARCH
The application of real options analysis to the hydro power projects is not limited to the type of
decision evaluated in this study. Other applications of real option analysis include of plant
dispatch, valuation of transmission assets, product pricing and structuring and various aspects of
risk management.
- 61 -
APPENDIX 1
ALL INDIA INSTALLED CAPACITY ( IN MW) OF POWER STATIONS LOCATED IN THE
REGIONS OF MAIL LAND AND ISLANDS
( As on 31.12.2012)
(UTILITIES)
Region
Ownership
Sector
Mode Wise Breakup
Grand
Total Thermal
Total
Thermal
Nuclear
Hydro
(Renewable)
RES
(MNRE)
Coal Gas Diesel
Northern
Region
State 14213 2219.2 12.99 16445.19 0 7052.55 1203.21 24700.95
Private 5610 108 0 5718 0 2148 3420.03 11286.03
Central 11500.5 2344.06 0 13844.56 1620 6256.2 0 21720.76
Sub Total 31323.5 4671.26 12.99 36007.75 1620 15456.75 4623.24 57707.74
Western
Region
State 16957.5 1915.72 17.28 18890.5 0 5480.5 444.42 24815.42
Private 15404 2805.5 0.2 18209.7 0 447 8005.62 26662.32
Central 10738 3533.59 0 14271.59 1840 1520 0 17631.59
Sub Total 43099.5 8254.81 17.48 51371.79 1840 7447.5 8450.04 69109.33
Southern
Region
State 11382.5 555.7 362.52 12300.72 0 11353.03 1343.63 24997.38
Private 2760 4047.5 576.8 7384.3 0 0 10753.15 18137.45
Central 9640 359.58 0 9999.58 1320 0 0 11319.58
Sub Total 23782.5 4962.78 939.32 29684.6 1320 11353.03 12096.78 54454.41
Eastern
Region
State 7010 100 17.06 7127.06 0 3168.92 330.16 10626.14
Private 5421.38 0 0.14 5421.52 0 0 106.55 5528.07
Central 10176.5 90 0 10266.5 0 713.2 0 10979.7
Sub Total 22607.88 190 17.2 22815.08 0 3882.12 436.71 27133.91
North
Eastern
Region
State 60 424.7 142.74 627.44 0 340 243.25 1210.69
Private 0 24.5 0 24.5 0 0 0.03 24.53
Central 0 375 0 375 0 860 0 1235
Sub Total 60 824.2 142.74 1026.94 0 1200 243.28 2470.22
Islands
State 0 0 50.02 50.02 0 0 5.25 55.27
Private 0 0 20 20 0 0 0.85 20.85
Central 0 0 0 0 0 0 0 0
Sub Total 0 0 70.02 70.02 0 0 6.1 76.12
ALL
INDIA
State 49623 5215.32 602.61 55440.93 0 27395 3569.92 86405.85
Private 29195.38 6985.5 597.14 36778.02 0 2595 22286.22 61659.24
Central 42055 6702.23 0 48757.23 4780 9349.4 0 62886.63
Sub Total 120873.4 18903.05 1199.75 140976.2 4780 39339.4 25856.14 210951.7
Sourcehttp://www.cea.nic.in/power_sec_reports
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